Is Angel Investing Dead?

by francine Hardaway on December 2, 2008

Ron ConwayImage via WikipediaAmazing,  the optimism in Silicon Valley compared to the rest of the country.

The angel climate cannot be said to be good, but it doesn't sound too bad compared to, say, the Big 3 automakers. It's much cheaper for a company to start up and keep running today, because the price of technology has gone down. If the company has started, and does have some traction, prices are low, and buyers will come in to the market and make small acquisitions. There will be exits. This was difficult for me to grok, but when you listen to investors from SoftTech, SV Angels, Felicis Ventures and August Capital talking to moderator Sam Angus from Fenwick and West, who sees it all,  and they are all in agreement, you have to believe.

Ron Conway, venerable angel and head of the Silicon Valley angels is invested in 130 companies now. Seventeen of them have less than a year of cash, and those are the ones he is worried about. "Without a year of runway, you are probably going out of business and you might as well shut down now," he says. Companies have to brace themselves and prepare, but if they do, they will be fine. There are two groups of founders: some aggressively took action, and
some held out and may run out of money. Some spaces are more crowded than others, and those will see consolidation.

Everyone is triaging their portfolios and choosing which ones they will support. Entrepreneurs should be asking their investors if they will be supported for the next 18 months. If not, they had best raise more money from other investors or radically cut expenses, because even a quick M&A deal won't happen in the next 18 months.

These angels also agree that the market's not nearly as bad as it was in 2001, when the epicenter of the crash was in Silicon Valley. The Valley is feeling the ripple effect of Wall Street, but deals are still happening on realistic valuations and terms.

Early stage companies who need $1m will get funded.  There will be very little debt anymore in the short term, though, and angels will have to take real equity and not convertible debt. This is good for VCs, because the companies will have to structure themselves as though they were going for a VC round — with a board, and all the documentation in place.

The good news for Silicon Valley is that the quantity and quality of deal flow haven't dropped.  The entrepreneurs haven't run off to law school like they did in 2002-3. Conway himself will make two more investments before the end of the year; his pace of investment is staying the same. This means the competition for good deals is less, and the people with the money are now in charge again. Valuations are back to 2003-4 levels.

This time, the entrepreneurs seem to realize that things change almost on a daily basis and they don't seem to be fighting changes in terms.This panel agrees that a good entrepreneur WILL get funded in this market. Early stage companies are actually doing better, because they are less expensive to invest in. Larger, bridge rounds are harder to come by.

Downturns are a wonderful time to start a company. Six or eight months ago it was more difficult to recruit quality people. It's the golden age for starting a company, say the angels.

Hot spaces: Video has been taken over by YouTube. Traditional search is dead, but crowdsourced search results are hot (Aardvark), as are "how to" web sites. Cloud computing is a huge space. E-commerce site, or sites with a built in user fee are also good. Mobile is a great space. Gaming, health care, personalized medicine will be good. Capital-efficient companies that make money and have a business model will be in demand.

A business plan is for you, not for an investor. Don't go write a 50 page plan that will change in 6 months. You will be raising money on the exec sum. And project costs, not necessarily revenues, which are always discounted anyway.

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